FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996 Commission File Number 0-19013
ADVANCED ENVIRONMENTAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 84-1059226
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
730 17th Street, Suite 712 Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (303) 571-5564
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) No X
of the Securities Exchange Act of 1934 during the pre-
ceding 12 months (or for such shorter period that the No
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the
past 90 days.
In July 1996, the Statement of Change in Beneficial Ownership of Securities
on Form 4 of Industrial Services Technologies, Inc. was filed late.
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the
latest practicable date.
Number of shares outstanding
Class at June 30, 1996
Common stock, $.0001 par value 531,667,515 shares
<PAGE>
Form 10-Q
2nd Quarter
INDEX
PART I - FINANCIAL INFORMATION *
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1996
and December 31, 1995
Condensed Consolidated Statements of Operations - For the Three
Months and Six Months Ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows - For the Six
Months Ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis
PART II - OTHER INFORMATION
ITEMS 1 through 6.
Signature
*The accompanying financial statements are not covered
by an independent auditor's report.
<PAGE>
<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS June 30, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 213,000 $ 186,000
Trade accounts receivable,
net of allowance for
doubtful accounts of $40,000 2,035,000 1,622,000
Unbilled trade receivables 55,000 17,000
Prepaid and other current assets 515,000 428,000
Income tax receivable, net 113,000 201,000
Total current assets 2,931,000 2,454,000
PROPERTY, PLANT AND EQUIPMENT:
Equipment 3,509,000 3,453,000
Furniture and fixtures 366,000 352,000
Transportation equipment 391,000 391,000
4,266,000 4,196,000
Accumulated depreciation (2,867,000) (2,658,000)
1,399,000 1,538,000
INTANGIBLES AND OTHER ASSETS:
Goodwill and other intangibles,
net of accumulated amortization
of $561,000 and $549,000 979,000 1,001,000
Other 8,000 3,000
Total Assets $ 5,317,000 $ 4,996,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 1,067,000 $ 904,000
Revolving loans 951,000 725,000
Current portion of
long term debt-
Financial institutions 339,000 348,000
Related parties 1,000 1,000
Accrued expenses and other
liabilities 749,000 591,000
Income taxes payable 12,000 -
Total current liabilities 3,119,000 2,569,000
LONG-TERM DEBT:
Financial institutions 1,006,000 1,171,000
DEFERRED INCOME TAXES 175,000 178,000
SERIES A REDEEMABLE CONVERTIBLE
PREFERRED STOCK:
$.0001 par value; 27,108,000
shares authorized; 27,108,000
and 30,648,000 issued and
outstanding in 1996 and 1995,
respectively; liquidation
preference of $220,000 in 1996
and $249,000 in 1995 176,000 237,000
COMMON AND OTHER STOCKHOLDERS'
EQUITY:
Preferred stock, $.0001 par value,
Convertible Series B; 100,000,000
shares authorized; 24,592,000
shares issued and outstanding;
liquidation preference of $200,000 2,000 2,000
Common stock, $.0001 par value,
2,250,000,000 shares authorized;
531,668,000 issued and outstanding 53,000 53,000
Additional paid-in capital 548,000 548,000
Retained Earnings 238,000 238,000
Total stockholders' equity 841,000 841,000
Total liabilities and
stockholders' equity 5,317,000 4,996,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
1996 1995
<S> <C> <C>
SERVICE REVENUES $2,264,000 $2,391,000
COSTS AND EXPENSES:
Service costs and expenses 1,610,000 1,741,000
Selling, general & administrative 725,000 685,000
Management fees, related party 36,000 24,000
Interest 115,000 125,000
Retrospective insurance adjustment (80,000) -
2,475,000 2,627,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (211,000) (236,000)
INCOME TAX BENEFIT (EXPENSE) 62,000 98,000
NET INCOME (LOSS) (149,000) (138,000)
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (163,000) $ (153,000)
NET INCOME PER COMMON SHARE AND
COMMON SHARE EQUIVALENT $ * $ *
WEIGHTED AVERAGE SHARES OUTSTANDING 531,668,000 531,668,000
- -------------------------
* Less than $.0001 per share.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
1996 1995
<S> <C> <C>
SERVICE REVENUES $7,298,000 $6,148,000
COSTS AND EXPENSES:
Service costs and expenses 5,349,000 4,142,000
Selling, general & administrative 1,414,000 1,376,000
Management fees, related party 72,000 48,000
Interest 136,000 117,000
Depreciation and amortization 231,000 269,000
Retrospective insurance adjustment (80,000) -
7,122,000 5,952,000
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 176,000 196,000
INCOME TAX BENEFIT (EXPENSE) (148,000) (125,000)
NET INCOME (LOSS) 28,000 71,000
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ - $ 36,000
NET INCOME PER COMMON SHARE AND
COMMON SHARE EQUIVALENT $ * $ *
WEIGHTED AVERAGE SHARES OUTSTANDING 531,668,000 531,668,000
- --------------
* Less than $.0001 per share.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,000 $ 71,000
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 231,000 270,000
Deferred income taxes (3,000) 21,000
Decrease (increase) in-
Trade accounts receivable (413,000) 1,267,000
Unbilled trade receivables (38,000) 145,000
Prepaids and other assets (87,000) (33,000)
Income tax receivable 88,000 -
Increase (Decrease) in-
Accounts payable 163,000 (610,000)
Accrued expenses 158,000 (205,000)
Income taxes payable 12,000 92,000
Net cash provided by (used in)
operating activities 139,000 1,018,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (70,000) (336,000)
Other (5,000) (3,000)
Net cash used in investing activities (75,000) (339,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving lines of credit 7,290,000 650,000
Repayments of lines of credit (7,064,000) (1,349,000)
Proceeds from issuance of long-term debt - 403,000
Repayments of notes payable (174,000) (185,000)
Redemption of Series A preferred stock (61,000) (50,000)
Dividends declared (28,000) (35,000)
Net cash provided by (used in)
financing activities (37,000) (566,000)
INCREASE IN CASH AND CASH EQUIVALENTS 27,000 113,000
CASH AND CASH EQUIVALENTS,
beginning of period 186,000 126,000
CASH AND CASH EQUIVALENTS,
end of period $ 213,000 $ 239,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ - $ 203,000
Cash paid for interest $ 139,000 $ 155,000
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the normal recurring
adjustments necessary to present fairly the financial position of the Company
as of June 30, 1996, the results of its operations for the three month and
six month periods ended June 30, 1996 and its cash flows for the six month
period ended June 30, 1996. Operating results for the three and six month
periods ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996.
The consolidated balance sheet as of December 31, 1995 is derived from the
audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. As a result, these financial
statements should be read in conjunction with the Company's form 10-K for the
fiscal period ended December 31, 1995.
2. CONTINGENCIES
The Company previously reported that a complaint was filed in March 1994 with
the Equal Employment Opportunity Commission ("EEOC") by a temporary employee
of the Company for claims of sexual harassment. In May 1996, the EEOC
concluded that there had been no violation of applicable statues and issued
a Dismissal and Notice of Rights which provides that unless the claimant
pursues the matter within 90 days, the claimant will have no further rights
to sue.
The Company also previously reported that during 1995, an individual
allegedly sustained injuries while providing services at a refinery. This
matter has been settled.
In addition, the Company also previously reported that (a) the Company's
general liability carrier is defending litigation pursuant to an
indemnification given by the Company regarding claims for damages in respect
of injuries alleged to have occurred at a refining facility and (b) demand
has also been made on the Company by a customer regarding a total of $219,000
which it paid to three employees of the Company for alleged injuries
sustained in October 1995 at the customer's facility. The Company's general
liability insurer has not responded to the demand in the latter matter.
The Company believes that, to the extent it may have any liability with
respect to the claims described in the paragraph immediately above, the
Company would be covered by its workers' compensation and general liability
insurance carriers. The initial premium paid by the Company with respect to
these policies is subject to adjustment based on certain insurance components
plus losses during the applicable policy periods. Based on estimates
prepared by the Company's insurers, the Company at December 31, 1995 accrued
a retrospective insurance premium of $300,000. This amount represents a
general reserve pending the resolution of the above claims, and various other
open routine claims incidental to the Company's business which affect the
same policy years and, therefore, the retrospective premium adjustments.
However, due to the uncertainty of various factual and legal issues which may
affect these claims, there can be no assurance as to the outcome of these
claims or the adequacy of the amount reserved.
<PAGE>
ADVANCED ENVIRONMENTAL SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
General - The Company, through its subsidiary, International Catalyst, Inc.
(Incat), provides catalyst handling services to chemical and petrochemical
refineries.
Liquidity and Capital Resources - The Company's working capital decreased
from ($115,000) at December 31, 1995 to ($188,000) at June 30, 1996. This
decrease in working capital is primarily attributable to operating losses
during the second quarter of 1996.
Incat has had a revolving working capital credit facility with a financial
institution since 1988, collateralized by its accounts receivable and other
intangible property. The maximum amount which may be outstanding from time
to time under the line is currently $1,400,000. On July 31, 1996, the
revolving working capital credit facility was renewed until April, 1997.
At June 30, 1996 there was a $951,000 balance outstanding on this
line-of-credit.
Net worth was $841,000 at December 31, 1995 and at June 30, 1996. No change
in net worth is due to net income of $28,000 for the six months ended
June 30, 1996, reduced by $28,000 in dividends declared on preferred stock
for the period.
In previous years, the Company financed capital equipment expenditures
through a $2,100,000 loan with a financial institution. The current balance
outstanding on this loan is approximately $1,303,000 and there is no further
availability. The loan is to be repaid in monthly installments of $46,000
with all unpaid interest and principal due December 31, 1997. The Company
currently has no commitments to purchase additional equipment.
The Company's available borrowings under its existing working capital credit
facility, existing cash and internally generated funds should be sufficient
to meet the current ongoing requirements of the operations of the Company.
<PAGE>
RESULTS OF OPERATIONS
Service revenues for the three months ended June 30, 1996 of $2,264,000 are
comparable with revenues for the three months ended June 30, 1995 of
$2,391,000. For the six months ended June 30, 1996, service revenues of
$7,298,000 increased by $1,150,000 from the six months ended June 30, 1995
service revenues of $6,148,000. The increase is mainly attributable to
rescheduling of 1995 work and work subcontracted to sister companies on two
large projects in the first quarter of 1996.
A significant percentage of the Company's sales are generated through
reputation and referrals. Management continues to emphasis its sales and
marketing programs in an effort to expand the Company's customer base.
However, a highly competitive market is making expansion more difficult.
Cost of services as a percentage of service revenues was 71% for the quarter
ended June 30, 1996 and 73% for the quarter ended June 30, 1995. For the six
months ended June 30, 1996, cost of services as a percentage of service
revenues was 73% as compared to 67% for the six months ended June 30, 1995.
Excluding subcontractor pass-through revenues of $1,074,000 and $585,000 for
the six months ended June 30, 1996 and 1995, respectively, service costs as a
percentage of service revenues were 69% and 64%, respectively. Subcontractor
costs are normally passed-through with an administrative charge of 0-10%.
The net increase in the cost of services as a percentage of services revenues
is attributable to an increase in direct costs in the first quarter. The
major factor contributing to the increase in direct costs in the first
quarter was lack of available manpower, the hiring of contract laborers at
rates in excess of pay rates for Company employees to perform the low gross
margin work and associated overtime, travel and per diem costs.
A $40,000 increase in selling, general and administrative (SG&A) costs, for
the three month period ended June 30, 1996 as compared to the same period
in 1995 is due primarily to adding an additional sales person in the
Southwestern Region. The Southwestern Region has been expanded and will now
oversee the sales and operations of the Southern Region, which the Company
closed down in May, 1996. Cost reduction from the closure will not be
realized until the third quarter.
Depreciation and amortization expense decreased for the three and six month
periods ended June 30, 1996 as compared to the corresponding periods in the
previous year due to some equipment being fully depreciated.
Income tax expenses in 1996 are impacted by foreign taxes primarily incurred
on contracts performed in Indonesia and Venezuela. Foreign taxes were
$60,000 for the six months ended June 30, 1996. There were no corresponding
foreign taxes in the same period in the previous year.
The Company's net loss for the three months ended June 30, 1996 was $149,000
as compared to net loss of $138,000 for the three months ended June 30, 1995.
The Company had a net income of $28,000 for the six months ended June 30,
1996 as compared to net income of $71,000 for the six months ended June 30,
1995. Overall net income decreased due to an increase in direct costs.
Management does not believe the increase in direct costs (exclusive of
subcontractor pass-though work) is indicative of the Company's future direct
costs or its impact on operating results.
Fiscal 1996 is expected to be a challenging year for the Company. Although
management anticipates revenues and profits to exceed prior fiscal year
results, there can be no assurance that such revenues and profits will be
realized. Service revenues will continue to be subject to significant
quarterly fluctuations, affected primarily by the timing of planned shutdowns
at its customers' facilities. The Company will continue to be affected by
general economic conditions, international economic conditions and conditions
which affect the industry and region such as labor costs, insurance costs and
competition.
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 6. Not applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of The Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED ENVIRONMENTAL SYSTEMS, INC.
(Registrant)
DATE: August 13, 1996 BY: /s/ J. Daniel Bell
J. Daniel Bell,
President, Director
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
JUNE 30, 1996 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 213,000
<SECURITIES> 0
<RECEIVABLES> 2,075,000
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,931,000
<PP&E> 4,266,000
<DEPRECIATION> (2,867,000)
<TOTAL-ASSETS> 5,317,000
<CURRENT-LIABILITIES> 3,119,000
<BONDS> 1,345,000
178,000
0
<COMMON> 53,000
<OTHER-SE> 786,000
<TOTAL-LIABILITY-AND-EQUITY> 5,317,000
<SALES> 7,298,000
<TOTAL-REVENUES> 7,298,000
<CGS> 5,349,000
<TOTAL-COSTS> 5,349,000
<OTHER-EXPENSES> 1,637,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,000
<INCOME-PRETAX> 176,000
<INCOME-TAX> 148,000
<INCOME-CONTINUING> 28,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
